Commentary

TARP: The bailout success story that wasn’t

Commentary: Wall Street’s bailout sinkhole keeps sinking

By

DavidWeidner

An earlier version of this column misstated where proceeds from the AIG stock sale would go. The column has been corrected.

SAN FRANCISCO (MarketWatch) — About those bank bailouts ...

Remember the Troubled Asset Relief Program, better known as TARP? When we last heard from the Treasury Department, on Jan. 23, TARP was being wound down. It was, in the estimation of Timothy Geithner & Co., a success: 93% of the $418 billion disbursed had been collected including $70 billion last year. Read the latest Treasury Department progress report on TARP.

The idea that TARP is somehow a wash because a few banks repaid the bailouts with interest is misleading. The reality is that bailed-out firms essentially wrote off their losses on taxes. As of Dec. 30, TARP was still owed $67.3 billion, including $27 billion in realized losses — which is to say, that money is gone and is never coming back. See the inspector general’s Jan. 30 report on TARP.

A new report by SNL Financial shows the Treasury Department is taking a beating in auctions of the Capital Purchase Program, one of the pipelines through which bailout money flowed.

The auctions essentially sell off TARP debt and equity to private investors. Unfortunately, investors aren’t really interested in zombie-bank debt. It’s been selling at an 8% to 20% discount. The last auction, on Jan. 25, met with a 35% discount. In all, the latest CPP auction cost taxpayers $104.5 million. Read more about how zombie banks are being kept afloat through bailouts.

There are additional and less hidden costs, of course. Ally Financial, the old automobile-financing company GMAC, is still $14.6 billion into TARP. The plan is to exit, but there’s no indication private investors will step up given the company’s recent financial record.

The Treasury Department said it was selling the remaining 16% stake in American International Group Inc.
AIG, -0.89%
in December, and it claimed a $7.6 billion profit on that part of the bailout.

More than one person has questioned where that $7.6 billion comes from. Neil Barofsky, the former inspector general for TARP, noted that a third of the AIG stock sold came from the Federal Reserve. So the proceeds of that aren’t going back to taxpayers, at least not directly. The Fed disperses income annually to the U.S. Treasury.

Then there was the tax benefit. The AIG “turnaround” story wouldn’t be complete without its amazing $19.8 billion profit at the end of 2011 — $17.7 billion of which was an accounting gain from “carry forwards,” or tax write-offs.

That’s just AIG. Bank of America Corp.
BAC, +0.20%
Citigroup Inc.
C, +0.14%
and General Electric Co.
GE, -0.72%
also famously benefited from crisis-era losses that turned into tax write-offs down the road.

This state of affairs is due largely to a bailout program that was rushed into action by the government, according to Christy Romero, the special inspector general for TARP.

The bailouts themselves rewrote the rules about government intervention in the private sector. But the authors left some important things out: tax treatment that made bailout recipients accountable, compensation limits and, most importantly, requirements that institutions pass on the goodwill of taxpayers to homeowners and customers who were also suffering.

“One of the most important lessons of TARP and the financial crisis is that our financial system remains vulnerable to companies that can be deemed ‘too interconnected to fail,’ ” Romero’s agency, SIGTARP, wrote in its January report, adding that “recent scandals such as J.P. Morgan Chase & Co.’s
JPM, -0.45%
‘London whale’ and Libor manipulation have shown that excessive risk taking continues unchecked by executives and boards of directors.” See: ‘Rain Man’ claims Libor scandal ‘goes much higher.’

The bailouts may have been necessary. It’s hard to imagine, but the counterfactual — that is, big banks failing and the wreckage that would cause the economy — would surely have been more catastrophic. Perhaps $60 billion is a fair price to pay for saving the economy.

But it also should buy us security. “Too big to fail” has been made worse. The concentration of financial power at B. of A., Citi, J.P. Morgan and Wells Fargo & Co.
WFC, -0.43%
puts the U.S.’s economic future at risk, all in the name of stability.

Stability? It’s quite the opposite, really.Even if we don’t lose a lot of money on the bailouts this time, who can say that next time we won’t? By calling the bailouts a success, we increase the likelihood that we’ll find out.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.